HOW TO MANAGE ASSETS IN AN INTERNATIONAL TRUST

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Our last newsletter answered the question “Do Border Controls Really Affect You?”identified a surprising (if not discouraging) number of restrictions today placed on the free movement of people and property. Today we take a look at more practical concerns of how to use an international trust for various asset types.

This newsletter asks the question:

How Do I Manage Assets Through an International Trust?

Prospective clients frequently ask how an international trust can be used for managing investments even though asset protection might be a motivating factor. While every situation is different, there are some basic factors to consider, regardless of where you reside, or the currency in which you invest your money.

Using an international trust for investment purposes provides a number of financial planning opportunities, one of which is providing you with greater investment diversification in global markets that would not otherwise be available through domestic investments.

And too, an international trust may allow you an opportunity to benefit from solid, legitimate tax planning.

And if privacy is important to you, an international trust can help keep prying eyes and potential busy bodies from knowing your every financial move. An international trust is also an excellent tool to obtain a high level of asset protection.

Naturally, estate planning can, and should be, integrated into an international trust for retirement and inheritance purposes.

The above are just a few of the reasons for using an international trust.

When I first review a new client’s personal financial situation, I begin with looking at the big picture. Understanding the asset types, how they are titled, and the value of those assets, is an essential starting point.

Having a clear understanding of what makes a client tick, and why, is critical before recommending options for a solid planning structure.

By way of example, let’s say you are middle-aged with various asset types (ever note how “middle age” is a moving target?). You own a home with $275,000 in equity, two real estate investment properties, one with $25,000 equity and the other with $290,000 in equity.

Let’s say your personal property (jewelry, art, etc.) is valued at $35,000 and you have $150,000 in tax-deferred savings and another $225,000 in various stocks, bonds, and cash acquired with after tax dollars.

(Even if the value of your assets is more or less - or you own a business, a professional practice or other assets - the following concepts are similar.)

In this example, most would say you have done fairly well with a current net worth of approximately $1,000,000. Since you still have earning-power years ahead, most likely mortgages and other debts will be paid down, investments over time will grow, and deferred income savings will increase.

Even though changes in the types of investments and values in future years are also certain to occur, for now we have a snapshot of your hypothetical financial situation.

The following are just a few factors to consider when setting up an international trust.

Let’s also say you presently own all investments in your name and seek greater diversification, higher yields and asset protection.

If you are a U.S. citizen, trading and investing in your own name limits your opportunities to only one-third of the world’s equity and bond investments as you are mostly locked out of global opportunities. This is due to the over-burdening U.S. Federal regulations imposed on foreign institutions that often simply refuse to deal directly with U.S. citizen-investors as a result.

Alternatively, if you invested through an international trust, you could open the doors to investing in quality equities and bonds found throughout the world. You and the trust will still be subject to U.S. taxes and compliances issues, but diversification and greater investment opportunities can be found.

Naturally, you also seek greater asset protection with your real estate investments, home, stocks, bonds, cash, and other personal property in a litigation-gone-mad-society. Since all of the assets are presently in your name personally – most of which took a lifetime to accumulate- one lawsuit could wipe out everything overnight.

Using an international trust can avail you to asset protection that simply is impossible to find at home…. however, there are offshore jurisdictions that are second to none for outstanding wealth preservation.

A common misconception is that sufficient insurance will solve any lawsuit concern. But what happens if the claim is excluded from coverage? Or, if a multi-million claim is in excess of liability limits? Worse yet, what happens if the insurance company goes bankrupt and you are left holding the bag?

Unfortunately, as a prior litigation attorney and former judge, I have witnessed all of these examples occur to unsuspecting good people, time and time again.

It is always a significant risk holding title to assets in your own name. The better approach is to hold title to assets in separate entities owned by an international trust you create, and then you use and control those entities and the assets therein. Separating title from use and control is an essential part in planning to protect your assets ….. more on this topic in another newsletter.

One example is placing title to your home in a single member limited liability company (the LLC would be owned by the trust), which may provide for full tax advantages found in home ownership … you would be the manager of the LLC, maintaining control with rights of occupancy. This could effectively provide an opportunity for safeguarding the home and $275,000 in equity from the failings of other investments and from personal lawsuits.

Then, stocks, bonds and cash totaling $225,000 could be held in a “Nest Egg” LLC. Since you are the LLC manager, you maintain management and control over the investment decisions. Keeping assets like stocks, bonds and cash separate from riskier assets, like investment real estate, for example, is generally considered safe and conservative planning.

The other personal property totaling $35,000 (the jewelry and art) could also be placed within the Nest Egg LLC, so long as none of the assets had high risk factors.

An important question to consider is how to treat the two real estate investment properties. For example, should they both be held in one LLC? Or, should they be separated into two different companies?

Significantly, risky assets like investment real estate (and businesses and professional practices) should always be segregated from other less risky assets.

An argument for each real estate investment to be placed into its own entity is that litigation against the investment with only $25,000 in equity will not expose it to the other real estate investment with $290,000 in equity. A small disadvantage is the cost and additional reporting requirements, which are generally minimal.

Alternatively, you might consider keeping both real estate investments into one LLC for now if the lesser equity investment is a low risk, and then segregate them in the future if risk intensifies, or as equity value increase. Otherwise, two separate LLCs would be a risk-adverse choice.

If instead of real estate investments you own a business or professional practice, a similar analysis to the above applies, with other details to figure into the equation.

Keep in mind that certain types of investments could have a negative tax consequence if transferred into an LLC, so care must be taken with the type of assets conveyed.

For example, great caution must be taken before transferring assets considered tax-deferred. Transferring the above $150,000 tax-deferred savings into an entity could, and probably will, trigger negative tax consequences.

However, there are some exemptions to this rule, particularly if you are in the process of taking distributions at retirement age.

Sounds like you are complicating life when using an international trust?

Not really. Once the trust is set up it is generally user friendly.

And the peace of mind often found in carefully protecting assets can not be over-emphasized.

I have also repeatedly found that once a client’s structure is properly established, tax advantages are more easily identified and achieved, instead of being overlooked.

And too, once you gain more confidence in investing beyond the shores of your homeland, diversification and better yields are more easily realized.

An added benefit to using an international trust for investment is that the trust agreement is a private document. It is not filed in a public domain (like company documents or probated Wills, etc.), achieving greater levels of privacy.

As noted above, integrating retirement planning, estate planning and asset protection into an international trust is generally part of the overall planning process for our clients.

Naturally, the terms of the international trust must be carefully drafted, and the entity formalities must always be satisfied. A plan that is “one-size fits all” should be avoided, since it rarely fits anyone.

And importantly, when your international trust structure is created, it needs to be flexible enough to allow you to adjust to your objectives as they change over time.

Issues of fraudulent conveyances, collateralized assets, control, and other legal topics come into play, but are beyond the scope of discussion today. Still, an international trust is a relatively uncomplicated and a commonly used planning structure for investment purposes and asset protection.

While there are common themes that run between many clients we consult with regularly, everyone is different. Customizing your plan to meet your needs is essential to reaching and maintaining personal objectives.

Always make certain that a qualified, experienced professional can customize a plan to meet your needs. Since planning structures can be ultimately challenged in a courtroom if you are sued, your planner should have courtroom savvy and planning should begin with these skills and objectives in mind.

And careful planning for flexibility should always be considered to allow your structure to adjust to the changes in your investments, the changes in value, and the changes that are certain to occur in your life.

(Licensed to Practice Law in U.S. States & Federal Courts;
Assoc. Member Auckland, N.Z. District Law Society - Foreign Lawyer; &

Assoc. Member Queensland Law Society, AU - Foreign Lawyer)

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